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AN OVERVIEW OF THE HOME FORECLOSURE PROCESS

An Overview of the Home Foreclosure Process


Foreclosure: Thelegalprocessusedbya lendertosecurepossession ofamortgagedproperty.

Among the most prominent features of the current housing crisis has been an unprecedented jump in the incidence of mortgage delinquencies and foreclosures. Public policy and financial market observers have attributed delinquency and foreclosure increases to a wide range of causes and have offered varying policy prescriptions for what remains a continuing problem. Allegations of improper or deficient practices on the part of mortgage originators and servicers have also been a major source of controversy over the past few years. By identifying and describing the procedures and requirements that characterize an appropriately executed foreclosure process, FHFA-OIG seeks to provide useful context and understanding for policymakers and members of the public. Most home purchases in the United States are financed through loans provided by banks or other lenders. Lenders, as part of the legal process that provides cash financing to borrowers, typically require a secured interest or mortgage on the property financed. Borrowers agree to accept the secured interest on their properties and to repay the loans provided over time. The foreclosure process typically commences only after a borrower has stopped repaying the loan (meaning that the loan has gone into default); the lender therefore uses the foreclosure process to recover the proceeds of the loan through the sale of the property. Foreclosure involves specific rights and obligations with respect to both the homeowner/borrower and the lender (or its representatives) through each step of the process. Before turning to default and the foreclosure process, however, this overview reviews the legal process supporting mortgage loans. It next turns to default, the gateway to foreclosure, before discussing the foreclosure process and loss mitigation options. This discussion will also identify sources of information regarding federal programs designed to assist homeowners who may be involved in, or at risk of, foreclosure proceedings.

FUNDAMENTALS OF THE MORTGAGE


A mortgage is a loan secured by real estate collateral, specifically the borrowers house or apartment.a While the term mortgage is used colloquially to refer to both the loan and the security, there are actually two separate legal documents: a note and a security instrument.

Although real estate investors may also finance their purchases of commercial properties, such as office buildings and rental apartment complexes, through mortgage debt, this discussion will center specifically on residential mortgages.

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The Note
Securitization: Aprocesswherebyafinancial institutionassemblespoolsof incomeproducingassets (suchasloans)andthensells aninterestinthecashflows assecuritiestoinvestors.See page20,Figure1.

The note represents the promise or agreement of the homeowner (mortgagor) to repay the loan to the lender or noteholder and specifies the terms of repayment, such as the interest rate and schedule of payments. Most mortgage notes are freely transferable from the original lender to others. Lenders, in fact, sell most loans to third parties, either directly or through the securitization process in which groups of mortgages are pooled together and sold as a security to investors. The Enterprises are the most prominent participants in the purchases and sale of mortgages; they accounted for approximately 70% of the nations issuances of MBS in 2010. Rather than lend directly to homeowners, they purchase mortgages from the original lenders and other buyers. The mortgage note specifies that the borrower must repay the noteholder, which may differ from the original lender if the loan is sold. Figure 9. Mortgage

The Security Instrument The security instrument is the separate legal document or agreement that pledges the house as collateral for repayment of the note. The security instrument goes by various names, such as the mortgage, the deed of trust (DOT), or the trust deed, depending on its form and the state in which the house is located. In many states, it is typically recorded in the county recorder of deeds offices in order to establish the mortgagees interest in the property as a matter of public record. This is important because it establishes the mortgagees rights in the property relative to other parties, including other mortgagees. The majority of mortgages are recorded using a private recordation company known as the Mortgage Electronic Registration System (MERS). When MERS is used, it is listed in county property records as the mortgagee, while the real mortgagee is tracked in MERS private registry. The validity of MERS various

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processes has been the subject of significant and on-going legal controversy.
Lien: Thelendersrighttohavea specificpieceofthedebtors propertysoldifthedebtis notrepaid.Withrespectto residentialmortgages,the noteholderretainsalienon thehouse(asevidencedby themortgageordeedof trust)untiltheloanisrepaid.

The form of the security instrument affects the foreclosure process. Legally speaking, a mortgage is the granting of a lien. The homeowner, as mortgagor, retains title to the property and grants a contingent interest to the lender as mortgagee. Alternatively, a DOT is more akin to a sale and repurchase: the homeowner, as trustor, gives title to the property to the DOT trustee, who holds it on behalf of the lender as beneficiary. The DOT trustee is typically a title company or a local attorney. The DOT trustee is charged with releasing the deed to the trustor if the loan is paid off or with foreclosing if the trustor defaults. In the standard DOT arrangement, if the homeowner defaults, the beneficiary noteholder will appoint a substitute trustee, often an affiliate, to handle foreclosure. The precise duties of DOT trustees may be a potential issue in foreclosures.b Figure 10. Deed of Trust

DOT trustees should not be confused with securitization trustees. Many securitizations involve a trust that holds legal title to the mortgages and notes. These trusts have a trustee a major financial institution that acts as an agent for the trust, carrying out functions such as remitting payments to investors in the securities issued by the trust and reporting to investors on the performance of the trusts mortgages. The actual management of the mortgages, though, is carried out by another entity, known as the servicer.
b

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The Servicer
Formoreinformationonthe servicer,seepages2627of thisreport,SelectedFHFA ProgramsandActivities.

All mortgage loans are serviced, meaning the payments are collected and the loan otherwise is administered, including the release of liens upon payoff or the management of defaults. The servicer may be an arm of the original lender, or it may be an unrelated third party, in which case it is acting on behalf of the current owner of the loan, typically under a detailed contract known as a pooling and servicing agreement or loan servicing agreement. As the majority of mortgage loans are sold by their original lender (sometimes referred to as the loans originator), most loans have servicers that are unaffiliated with the original lender. For example, the Enterprises do not service any of the loans they own themselves; instead, they use third-party servicers, typically affiliates of the parties that sold the loans to them. Subcontracting arrangements are common in servicing, so a borrowers contact may in fact be with a subservicer, a vendor, or an attorney engaged by one of these parties. Both servicing and subservicing contracts frequently impose limitations on the servicers ability to manage the loan, including when and how the servicer may modify or otherwise restructure a loan.

DEFAULT
Default is the prelude to foreclosure. Although various technical defaults are possible, the typical default is a failure to make payments as required on the mortgage. Most mortgages require defined payments each month (though the amount due may vary if the mortgage has an adjustable rate), and mortgage servicers will often refuse to accept partial payments. Figure 11 illustrates the remediation process for a defaulted loan. The outcomes following a default depend on factors such as the amount and degree of delinquency, the borrowers overall financial situation, the value of the property and amount of indebtedness, the servicers economic interests (as distinct from the mortgagees), and constraints placed on the servicer by contract and applicable laws. Thus, a defaulted residential mortgage may return to good standing, or be modified, or the property may be sold or repossessed by the mortgagee via foreclosure or a voluntary surrender. Generally, servicers will not commence a foreclosure until a mortgage is 90 days delinquent that is, until the borrower has missed three consecutive payments. Thus, a homeowner can conceivably fall behind on a mortgage for a month or two and catch up without the servicer commencing a foreclosure. However, it is important to note that a servicer

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may legally begin foreclosure proceedings before a mortgage is 90 days late. Ninety days is a common practice, not a legal requirement. Figure 11. Foreclosure Process Flowchart

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Loss Mitigation In some cases, the default may be cured and the loan reinstated. In addition, depending on individual circumstances, alternatives may exist that permit defaulted borrowers to remain in their homes while addressing their payment delinquency. It is important to note that most of these options are voluntary, but state law and contractual arrangements, including the acceptance of MHA program funds from Treasury, may trigger particular loss mitigation duties on the part of the servicer.
Mediation: Mediationisaprocessby whichaneutralthirdparty (mediator)assiststhe homeownerandlenderin reachingafair,voluntary, negotiatedagreement.The mediatordoesnotdecide whoisrightorwrong.

Mediation. Many states offer or require pre-foreclosure mediation between homeowners and servicers. In some states servicers are required to mediate in good faith in order to proceed with foreclosure. This may include presenting the homeowner with all appropriate paperwork for a foreclosure and having authority to accept settlement offers. Modification. Common modifications include extending the mortgages maturity date, adding past-due payments to the end of the mortgage, and making both permanent and temporary interest rate reductions. In most cases, when appropriately applied, these measures will lower the borrowers re-amortized monthly mortgage payment to a more affordable level. Reductions in the borrowers unpaid principal balance are uncommon. Although HAMP permits principal reductions at participants option, the Enterprises do not provide for principal reductions in their implementation of HAMP. Homeowners should be aware that under certain circumstances the forgiven debt may be deemed income for tax purposes.1 Forbearance. Lenders may always exercise forbearance on defaulted loans, meaning that the lender may simply decline to proceed with foreclosure. Homeowners have no right to forbearance, unless they are active duty military servicemembers covered by the Servicemembers Civil Relief Act or have been so within the previous 90 days. Note that some types of modifications, such as ones that tack past-due balances onto the end of loans as balloon payments, are sometimes referred to as forbearance. By contrast to payment reductions, payment forbearance involves temporarily suspending the need to make mortgage payments. In their guidance to loan servicers, Fannie Mae and Freddie Mac permit payment forbearance for up to six months in the cases of unemployed borrowers. Servicers must consider unemployed borrowers for such forbearance

Figure12,attheendofthis overview,liststhosestates thatofferorrequire mediationaspartofthe mortgageloandefault remediationprocess. Adetailedlistingofborrower eligibilitycriteriaforHAMP andotherMHAassistance programsisavailableat www.makinghomeaffordable. gov. ThewebsitesofFannieMae (www.fanniemae.com)and FreddieMac (www.freddiemac.com) incorporateutilitiesthat permitborrowerstolearn whetherthoseorganizations guaranteeorownspecific homeloans.

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before consideration for a HAMP loan modification. Borrowers who are not offered any such forbearance must be evaluated for HAMP.
CommonMisperceptionsAboutEnterprisePoliciesforHAMPParticipants Publishedreportsindicatethatmistakenoroutdatedunderstandingsmaypersistamongparticipants(both servicersandborrowers)inHAMPforloansownedorguaranteedbytheEnterprises.Threecommon misperceptionsarediscussedbelow: HAMPParticipantsMustBeDelinquent.HAMPdoesnotrequirehomeownerstobeactuallydelinquent intheirpaymentsbeforeparticipating.Despitereportedcasesofmortgageservicersindicatingthat homeownersmustbedelinquent,andinsomecasesactuallyencouragingthemtofallbehindintheir payments,programguidanceandtheEnterprisesservicerdirectivesexplicitlypermitparticipationby homeownerswhoremaincurrent,butforwhomdefaultisreasonablyforeseeable. HAMPRequiresaVeryLongTrialPeriod.TheEnterprisespublishedguidancestatesthattheinitialtrial periodforHAMPparticipantsmustbethreemonthslongformortgageloansalreadyindefaultandfour monthslongformortgageloanswheretheservicerhasdeterminedthatdefaultisimminentbuthasnot yetoccurred,contrarytoreportedinstancesofborrowersmakingtrialpaymentsformuchlonger. TheForeclosureProcessCanProceedWhileLossMitigationEffortsareUnderway.AsaresultofFHFAs ServicingAlignmentInitiative,currentEnterpriseguidancestatesthatservicersmaynotcommencethe foreclosureprocessaslongastheyareengagedinagoodfaitheffortwiththeborrowertoresolvethe delinquency.Dualtrackingasingleloanforbothforeclosureandmodificationisprohibited. Additionally,beforealoanisreferredforforeclosure,theservicermustalsoperformaformalreviewof thecasetoensurethatappropriatealternativeswereconsidered.

Refinancing. Another option for handling a defaulted loan is to replace it with a new loan via a refinancing. The terms of the new loan can be whatever the borrower and new lender negotiate; the proceeds of the new loan are used to pay off the balance on the old loan. When the old lender is paid off, the old lender releases its lien on the property. The difference between refinancing and modification is that refinancing entails a new loan, whereas modification is simply a change to the terms of an existing loan. A refinancing can involve the substitution of a new lender for the existing lender or a new loan from the existing lender, whereas a modification involves the same lender. Because a refinancing involves a new loan, there are generally closing costs associated with a refinancing, whereas modification may or may not involve fees to the borrower. Traditionally, refinancing requires the payment in full of the existing loan. Most mortgage loans have due on sale clauses that require payment of the full balance of the loan upon the sale of the property and further define a refinancing as a sale. Unless the existing mortgage is paid off, the existing mortgagee continues to hold a lien on the property that is senior to the new lenders. Payment in full via a refinancing thus requires the

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Equity: Inthecontextofresidential mortgagefinance,equityis thedifferencebetweenthe fairmarketvalueofthe borrowershomeandthe outstandingbalanceonthe mortgage(andanyotherdebt securedbyit,suchashome equityloans). Underwater: Termusedtodescribe situationsinwhichthe homeownersequityisbelow zero(i.e.,thehomeisworth lessthanthebalanceofthe loan(s)itsecures).

homeowner to have equity in the property, as today lenders will almost never extend credit beyond the value of the property (above a 100% loanto-value ratio). Accordingly, refinancing has not been an option, generally, for borrowers who are underwater, even if they are current on their mortgage. However, the Enterprises will refinance qualifying underwater mortgages they own or guarantee under the federal governments Home Affordable Refinancing Program (HARP). Loans that are held on banks balance sheets or in private-label securitizations are not eligible for HARP. In addition, some lenders will accept a short refinancing in which they receive less than the full unpaid principal balance, may forgive the remaining balance, and release the lien. They may choose to do so if they believe that they will make more in a partial payment via a refinancing than they will in a foreclosure sale. FHA, for example, offers a shortrefinancing program: for qualifying borrowers who do not currently have FHA-insured loans, FHA will insure a new first lien mortgage loan at up to 97.75% loan-to-value ratio based on a fresh appraisal. This means that the existing lender must agree to a write-down of the balance as part of the refinancing. FHA requires that the existing lender reduce the existing balance by at least 10% and that the combined loan-to-value ratio of all mortgages on the property be no more than 115%. While short refinancing may be a valuable solution for underwater borrowers, refinancing with a new lender is often very difficult for borrowers with impaired credit scores (which includes any borrower who has defaulted), or even for those with relatively good credit scores.

On October 24, 2011, FHFA announced revisions to HARP to expand the number of eligible homeowners. FHFA-OIG will discuss these revisions in greater detail in the next Semiannual Report.

FORECLOSURE AND ITS EFFECTS


If loss mitigation efforts do not succeed, the defaulted loan will proceed to foreclosure. There are two basic types of foreclosure. Judicial foreclosures proceed through the court system, while nonjudicial foreclosures take place outside it. The type of foreclosure process and other specific features are governed by state law, which varies considerably among the states, and by the terms of the mortgage itself. Some mortgages permit only one type of foreclosure. Some states permit only one type of foreclosure, while others provide for the possibility of either. State law can also vary depending on the type of property involved (its size and use) and by whether the mortgage was a purchase money mortgage or a refinancing of a previous mortgage. This overview is designed to present a general description of the foreclosure process. Actual state law may vary from the process described herein, and this overview should not be relied upon as a legal guide.

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Judicial Foreclosure A judicial foreclosure is a litigation process with a specific remedy. Generally, the loan servicer, on the noteholders behalf, commences the foreclosure by filing a suit against the homeowner. If those bringing the suit cannot prove that they are acting on behalf of the party entitled to repayment under the terms of the note, they may lack legal standing to do so. Similarly, a foreclosure may be invalid if the foreclosing party or its representative files suit before becoming the holder of the note and the mortgagee.
JuniorLienholder: Thesecurityinterestthatcan beavailedonlyafterthe seniorlienissatisfied,is calledajuniorlien.The holderofthissecurityinterest isthejuniorlienholder. Dependingontherelative priorityofthejuniorlien,the juniorlienholdermaybethe secondmortgagee,third mortgagee,etc.Forexample, abankholdingahomeequity mortgageonahomeisthe juniorlienholdertothebank holdingtheprimary mortgage.

To begin a foreclosure action, the noteholders representative files various documents with the court in the form of a complaint. It also must serve the complaint to the homeowner, notifying him or her of the litigation. Additionally, notice must typically be sent to all junior lienholders, such as home equity lenders. The specific requirements vary by state, but state law typically requires the foreclosing party to assert for the record that: the homeowner is indebted to the foreclosing party; the homeowner has defaulted on the loan; the loan is secured by a mortgage, and the foreclosing party is or represents the mortgagee; and service of process has been made on the homeowner.

These are typically made via affidavits sworn written statements submitted to the court. For example, the fact and amount of the indebtedness are typically established via an affidavit of indebtedness. State law requires that affidavits be sworn out by affiants who have personal knowledge of the facts to which they attest. Such affidavits are typically notarized.

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Robosigning.Inmid2010,certainleadingmortgageservicerswerefoundtoberoutinelysubmittingflawed affidavitstocourtsinforeclosurecases.Affidavitsaresupposedtobeswornoutbyaffiantswithpersonal knowledgeofthefacts,whichareattestedtointheaffidavit,suchasthefactandamountofthe homeowner'sindebtednessandthatthehomeownerhaddefaultedontheloan.Inthecourseofdepositions inforeclosurecases,servicerswerefoundtohaveemployeeswhosesolejobwastosignforeclosure affidavits,asmanyas10,000affidavitsinasinglemonthbysomeemployees(roughlyoneperminute).These employeeshadnopersonalknowledgeofanyofthefactstowhichtheyattested. Asrobosigningbegantogarnermediaattention,severalmajorservicersimposedvoluntarymoratoriaon theirforeclosureactivities.Allhavesubsequentlyresumedforeclosures,althoughsomeforeclosurefilings havebeenwithdrawnandresubmittedand,inMaryland,astatejudgethrewoutover10,000foreclosures filedbyAllyFinancialInc.(formerlyknownasGMAC,LLC)becauseofrobosigning.Federalbanking regulatorscommencedaninvestigationofrobosigningpracticesthatresultedinconsentordersbetween leadingservicersandthefederalregulators,inwhichtheservicersagreedtoimprovedinternalcontrols. Stateattorneysgeneralarestillinvestigatingrobosigningandrelatedissues. Whilemediaattentionwasfocusedonthelackofpersonalknowledgeoftheaffiantsandthesheervolumeof signaturesmadebyindividualrobosigners,moreseriousissueslurkintherobosigningscandal.Inparticular, thebackdatingofmortgagetransferdocumentswasthefocusofthedepositionsinwhichrobosigningwas uncovered.Thedateofthetransferofamortgageiscriticalforthreereasons: First,itmayaffectwhetheraservicerhaslegalstandingtoforeclose;onlythemortgageehassuch standing.InIbanezv.U.S.Bank,theMassachusettsSupremeJudicialCourtupheldthereversalofa foreclosureinwhichtheservicercouldnotprovethattheloanhadbeentransferredtothe securitizationtrustbeforetheforeclosurewascommenced. Second,itmayaffectwhethertheservicerisa"holderinduecourse,"aspeciallegalstatusthat preventsthehomeownerfromraisingcertaindefenses(includingthatthehomeownerwasfraudulently inducedintothemortgage)andcounterclaims.Apartythatreceivesaloanthatisindefaultcannotbe aholderinduecourse,sodeterminingthedateoftransferiscriticaltoensurethatthehomeowneris notwrongfullydeprivedofhisorherlegalrightstoraisedefensesandcounterclaims. Third,forsecuritizedloans,taxandtrustlawrulesdependonthedateofthetransfer.Iftheloanwas transferredtoolate,theremaybeadversetaxconsequencesfortheinvestorsinthemortgagebacked securitiesandthetransfermayitselfbevoidundertrustlaw.

Thus,issuesrelatedtothetimingoftransfersofmortgages(oftenreferredtoas"chainoftitle")have profoundlegalimplications.

Generally, state law requires that a copy of the mortgage note accompany the complaint. The foreclosing party may be required to produce the original wet ink or blue ink note. Often state law requires the filing of the mortgage itself as part of the complaint, but because recorded mortgages (unlike notes) are public records, a reference to the mortgage may be sufficient. Some states also require certification of mandatory loss mitigation efforts, such as mediation, prior to foreclosure. Most judicial foreclosures are not contested and result in default judgments against the homeowner. In such cases, it is rare for courts to undertake more than a cursory examination of the sufficiency of the foreclosing partys filings.

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If a homeowner contests a foreclosure, either because of procedural deficiencies or on the basis of substantive defenses and counterclaims, then the case is litigated like a regular civil action. A homeowner's ability to raise defenses and counterclaims depends on whether the foreclosing party is a holder-in-due-course of the defaulted note. To be a holder-indue-course, the foreclosing party must: (1) possess the actual note; (2) have given value for the note and taken it in good faith; and (3) have no notice of any defect in the note, including that the note is in default. This means that if the note were transferred to the foreclosing party subsequent to the default, the foreclosing party is not a holder-in-due-course, so the homeowner may raise a full battery of defenses and counterclaims in the foreclosure action.
ShowMeTheNote.Foreclosuredefenselitigationhasbeguntofeaturevariationsoftheshowmethe notedefense,inwhichthehomeownerchallengestheforeclosingpartytoprovethatithastherightto foreclose.Initsmostbasicform,thisdefenseisademandthattheforeclosingpartyproducetheoriginal mortgagenote,butthetermreferstoarangeofchallengesrelatingtotheforeclosingpartysstanding. Critically,theshowmethenotedefensedoesnotinvolveaclaimthatthehomeownerisnotindefault. Instead,itfocusesonwhethertheforeclosingpartyisthepartythatislegallyentitledtoforecloseandhas madetherequiredevidentiaryshowings.Determiningtheproperpartyisimportantforissuesoflegal standing,holderinduecoursestatus,andthehomeownersabilitytoraisevariousdefensesand counterclaims,andbecauseitaffectssettlementabilitiesandincentives.Aportfoliolender,forexample,may haveverydifferentsettlementabilitiesandincentivesthanathirdpartymortgageservicer. Kempv.CountrywideHomeLoans,Inc.,449Bankr.624(Bankr.D.N.J.2010)providesanillustrationofa successfulshowmethenotedefense.InKemp,thehomeownerhadtakenoutaloanfromCountrywide HomeLoans,Inc.Countrywidesubsequentlysecuritizedtheloan,sellingittoatrustnamedCWABSAsset BackedCertificates,Series20068.TheBankofNewYorkservedastrusteeforthetrustandCountrywideas servicerforthetrust. Thehomeownerfiledforbankruptcy,havingpreviouslydefaultedonhismortgage.Countrywide,asservicer, filedaclaiminthebankruptcyonbehalfofthetrust.Thehomeownerchallengedthatclaimbasedonthefact thatthemortgagenotehadnotbeenproperlyendorsedtotheBankofNewYorkastrusteeforthe securitizationtrustandwasneverplacedintheBankofNewYorkspossession.Accordingly,thehomeowner argued,thetrustwasnotapartyentitledtoenforcethenote,asonlyaphysicalholderofthenote,anon holderinpossession,orsomeonewhohaslostanotemayenforceanote. Duringthetrial,Countrywideproducedanallongeaseparatesheetofpapertobeaffixedtoanoteto allowroomforadditionalendorsements.Thisallongecontainedtheendorsementthatwasmissingonthe noteitself(albeitwithanerrorinthenameofthetrust).Countrywidesofficialwitness,however,testified thattheallongehadbeencreatedinanticipationofthelitigation.Theofficialwitnessfurthertestifiedthat theoriginalnotehadneverleftCountrywidespossessionandthatthenewallongehadneveractuallybeen affixedtothenoteitwassimplyapieceofpaperwithanendorsement,butnoindicationofwhathadbeen endorsed. ThebankruptcycourtdeniedtheclaimCountrywidehadfiledonbehalfofthetrustbecausethetrustcould notshowthatitwasapartyentitledtoenforcethenote.Thetrustwasneitheraholderofthenote(an ownerofthenoteinphysicalpossessionofthenote),noranonholder(someonewholacksownershipofthe note)inpossessionofthenote,norhaditlostthenote.BecausetheBankofNewYork,astrustee,and Countrywide,asitsagent,werenotentitledtoenforcethenote,thebankruptcyclaimagainstKempwas disallowed.

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If the court awards judgment to the foreclosing party, the property is then scheduled for sale, typically by the county sheriff. Sale scheduling is determined in part by requirements for advertisement of the sale for a minimum time period. The homeowner may, of course, appeal the foreclosure judgment. Nonjudicial Foreclosure Nonjudicial foreclosures proceed rather differently. There are no court filings or showings of proof required. Instead, in a nonjudicial foreclosure, the foreclosing party must notify the homeowner of the default and the scheduled sale. Sometimes this requires a formal notice of intent to foreclose. It is also required to advertise the sale. Advertisement requirements vary significantly by jurisdiction, but generally the sale must be advertised in a newspaper of record for the community for a few weeks prior to the sale. The assumption in a nonjudicial foreclosure proceeding is that the foreclosing party has the right to foreclose, provided that it appropriately provides notice and advertises the sale. A nonjudicial foreclosure may effectively be transformed into a judicial foreclosure if the homeowner brings a quiet title action or the equivalent, which has the effect of contesting the foreclosure sales transfer of title to the foreclosure sale purchaser. Conversely, foreclosure sale purchasers will sometimes bring subsequent judicial actions to ensure quiet title, particularly if there are any questions about the procedural propriety of the sale. The Foreclosure Sale The rules governing the actual foreclosure sale vary by jurisdiction. Sales are conducted by auction, but there are usually few if any rules governing the actual sale in nonjudicial foreclosures. The timing and the bidding in judicial foreclosure sales is frequently specified in detail by statute, including minimum bids, appraisal requirements, deposits, and completion of payment. Some jurisdictions, however, leave details of the bidding up to the local government official, typically the sheriff, who conducts the auctions.
Perfection: Thelegalrecordingof evidenceforacreditorslien onaparticularitemof property.

Two constant rules for all foreclosure sales are the order of payment and the effect on liens. The proceeds of a foreclosure sale are used first to cover the expenses of the sale. They are then paid to the foreclosing party, and, if there are surplus funds, to junior lienholders in their order of seniority. Rules of lien priority generally follow a first-in-time, first-inright pattern, with the first lienholder to perfect its lien (by making the
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necessary legal filings or automatically in some cases) having seniority over subsequently perfected (or unperfected) liens. There are many exceptions to this pattern, however. Notably, state tax liens frequently have priority over other previously perfected liens. If any surplus remains, it is paid to the (former) homeowner. There is no right for prospective buyers (or the foreclosing party) to inspect the property before the foreclosure sale. Prior to the completion of the sale, the property still belongs to the mortgagor/homeowner. Accordingly, third parties tend to discount foreclosure sale purchase bids heavily. Although they can ascertain the external condition of the property, they cannot discern the layout or condition of the property internally, and many foreclosed properties have been damaged prior to sale. The inability to inspect the property pre-sale, as well as the foreclosing partys ability to credit bid, means that there are relatively few bidders in most foreclosure sales other than the foreclosing party. Most foreclosure sale properties are purchased by the foreclosing party via a credit bid. This means that the foreclosing party bids the amount it is owed on the loan rather than bidding with cash. In other words, a credit bidding party merely credits itself rather than writing itself a check. A credit bidding party typically bids in the full amount of the debt owed, which means that a third-party bidder must be willing to pay a higher cash price to win the auction. By credit bidding, the foreclosing party can obtain clear title to the property, inspect the property, fix it as necessary, and then resell it subsequently. It is important to note that foreclosure sales are frequently cancelled or rescheduled. This may occur for a variety of reasons, including ongoing negotiations between the borrower and the lender; intervening bankruptcy filings; and inability to complete procedural steps, including accumulation of necessary documentation. Cures
Acceleration: Thedeclaringofadebtdue andpayableimmediately. Lendersmaypossessthis rightundercertain conditions,accordingtothe termsoftheobligationor applicablelaw.

Until the completion of the foreclosure sale, the homeowner may cure the default and stop the foreclosure. Typically this requires payment of the entire mortgage debt, as the lender will have accelerated the debt. The lender may be willing, but is under no obligation, to stop the sale if only past due payments are tendered. If the homeowner files for bankruptcy, the foreclosure sale is automatically stayed, and federal bankruptcy law permits homeowners to

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unwind the acceleration of a mortgage and cure by paying only the past due payments and associated costs. Deficiency Judgments The foreclosure sale may not provide proceeds sufficient to satisfy the mortgage debt. In such cases, the noteholders representative (and any junior lienholders) may seek a deficiency judgment a legal judgment for the remaining amount of the debt. A deficiency judgment is an unsecured debt, like credit card debt, and collection follows the procedure for other unsecured debt. This means that deficiency judgments are often difficult for lenders to collect, as many states place restrictions on wage garnishment and unsecured debts are generally dischargeable in bankruptcy. Accordingly, noteholders often sell deficiency judgments to third-party debt collectors at substantial discounts from face value. Attempts to collect these debts are typically subject to the provisions of the Fair Debt Collection Practices Act as well as to state debt collection law. The availability and procedure for a deficiency judgment varies by state and foreclosure process. Generally, deficiency judgments are not available when nonjudicial foreclosure is used because of concerns that private sales might be manipulated to suppress foreclosure sales prices in order to produce a larger deficiency judgment. In some states, deficiency judgments are available automatically following a judicial foreclosure. In others, the foreclosing party must file a motion or a complaint for a deficiency judgment. Even then, there is variation as to whether a deficiency judgment (if allowed) is awarded as a matter of right or by judicial discretion. Right of Redemption
Figure12,attheendofthis overview,summarizes provisionsforrightof redemptionbystate.

In some states, homeowners have a statutory post-foreclosure sale right of redemption. This means that the homeowner can redeem reclaim title to the house by tendering the amount of the unpaid debt and foreclosure sale costs. The length of the statutory redemption period varies considerably, from as short as 10 days in New Jersey to 2 years in Tennessee. The existence of rights of redemption is a factor foreclosure sale purchasers are likely to consider, as they run the risk of being deprived of their foreclosure sale purchase (even though the purchase price is returned). While it is uncommon for foreclosed homeowners to come up with the cash to redeem their properties during the redemption period, the right is exercised at times.

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Eviction If the former homeowner does not voluntarily surrender the property following the foreclosure sale, the foreclosure sale purchaser can have the former homeowner evicted. Eviction is also a state law procedure; the precise process varies by state law, but it is not always automatic. Because foreclosure sale purchasers are often concerned about former homeowners damaging the property before they leave, they are often willing to negotiate with homeowners regarding relocation timetables and costs. They are, however, under no obligation to do so. Renters Living in Foreclosed Property Sometimes a foreclosed property is occupied by renters. Renters rights in a foreclosure involving their landlord vary by state. Since 2009, however, the Helping Families Save Their Homes Act has included minimum protections for renters in the foreclosure of most mortgages, including all mortgages owned by the Enterprises. If the renter has a bona fide lease entered into prior to the notice of foreclosure, then the renter may occupy the property until the end of the remaining term on the lease unless the renter is given notice of termination by the foreclosure sale purchaser, in which case the renter has 90 days of occupancy rights. If the renter is not renting under a lease or the lease is terminable at will, then the renter also has 90 days of occupancy rights from notice of termination. Some states give renters additional occupancy rights; others merely give renters the right to notice of the foreclosure. Liability for Insurance, Taxes, and Homeowners Fees Until title passes to the foreclosure sale purchaser, the homeowner typically remains liable for taxes, homeowners association dues, nuisances, and accidents on the property. Noteholders or their representatives typically have the right to force-place insurance on the property if the homeowner has failed to maintain insurance payments. Force-placement of insurance involves the noteholders purchasing insurance on the property with itself as the loss-payee. Force-placed insurance can be expensive relative to regular insurance, and some servicers force-place insurance with their affiliates. Post-sale, the liability falls on the propertys new owner. In some communities, however, a phenomenon known as bank walkaway has occurred in which a servicer will commence a foreclosure, but not complete it. Frequently, bank walkaway occurs when the propertys value is so low that it is not worth the expense of foreclosure. In bank walkaway cases, the homeowner remains the owner of the property, although in

Federal Home Finance Agency Office of Inspector General | 16

many cases he or she will have moved out because of the anticipated foreclosure. Because the homeowner remains the title owner of the property, he or she remains liable for property taxes and upkeep. Thus, the homeowner could be subject to fines and other penalties if the property becomes a nuisance, or the homeowner could be liable for accidents that occur. Similarly, the noteholders representative may complete the foreclosure and purchase the property itself in the foreclosure sale, but fail to record the deed in its own name. In such cases, the homeowner remains liable for property taxes. Impact on Credit Score Mortgage defaults, foreclosures, deeds in lieu of foreclosure, and short sales can have adverse impacts on consumers credit scores. A default, foreclosure, deed in lieu, or short sale may remain on a consumers credit report for up to seven years. A bankruptcy may remain on a consumers credit report for up to 10 years. The presence of adverse events on credit reports is likely to lower a consumers credit score, which can make it more difficult or expensive for a consumer to obtain credit in the future. Credit reports are also used by insurers and employers, so adverse credit events can affect the cost of insurance and/or employment opportunities.

FORECLOSURE ALTERNATIVES
MoreinformationonHAFAis availableat www.makinghomeaffordable. gov/programs/exit gracefully/Pages/hafa.aspx.

Depending on individual circumstances, alternatives may exist to foreclosure proceedings that reduce expenses or legal liability for troubled homeowners. However, like foreclosure, these options will typically result in the homeowners loss of his or her house. These alternatives may include short sales, deeds in lieu, and bankruptcy. The Enterprises participate in the federal governments HAFA program, which is designed to encourage alternatives to the foreclosure process for troubled home mortgage loans. Participating HAFA servicers may not seek deficiency judgments and may provide relocation incentives of up to $3,000 for eligible homeowners who tender deeds in lieu of foreclosure or do short sales. Short Sale Lenders may agree to a short sale, in which the homeowner conducts a private sale of the house, and the lender releases its lien in exchange for the sale proceeds, even though the sale proceeds are insufficient to pay off the debt. A short sale does not necessarily discharge the homeowners debt; it merely results in a release of the lien, so the homeowner may still be liable for the deficiency. If the lender forgives the deficiency, it may be

Federal Home Finance Agency Office of Inspector General | 17

imputed as taxable income for the homeowner, particularly if the mortgage had a cash-out component. There are certain barriers to a short sale. Servicers are frequently wary of short sale offers because of concerns that they are settling the debt at too low a price and that the bidder may have colluded with the homeowner. In addition, the high rate of denials for short sale offers has made realtors reluctant to handle them because realtors are only paid upon consummation of a sale and put in more effort in short sales than for regular sales. Deed in Lieu of Foreclosure Lenders will sometimes accept a deed in lieu of foreclosure. This means that the homeowner will surrender title and possession of the property voluntarily, rather than requiring the lender to go through the full foreclosure process. For the lender, a deed in lieu spares the time and expense of the foreclosure process. For the homeowner, a deed in lieu may be attractive because the terms under which the homeowner surrenders the property may be negotiated the lender may be willing to provide the homeowner with some relocation funds or a more generous timetable for moving out. Critically, a deed in lieu does not extinguish junior liens, so the lender will acquire the property with junior liens still attached. Thus, if neither the homeowner nor the lender who has taken the deed in lieu pays off the junior lienholder(s), the latter may foreclose on the property. Accordingly, lenders may be reluctant to accept deeds in lieu when there is a junior lien on a property. Bankruptcy A homeowner may file for bankruptcy at any point before, during, or after the foreclosure process. Bankruptcy is a federal judicial proceeding. A bankruptcy filing automatically stops the foreclosure process. If a lender wishes to proceed with a foreclosure against a bankrupt homeowner, the lender must get permission from the bankruptcy court to do so. If the homeowner files for Chapter 7 bankruptcy and has defaulted, the homeowner will not be able to retain the property after the bankruptcy absent the lenders consent. If the homeowner files for Chapter 13 bankruptcy and has defaulted, the homeowner may de-accelerate the note and cure the default simply by making up missed payments rather than the full amount of the note. The homeowner may not, absent the lenders consent, modify the terms of the mortgage in bankruptcy if the property is

Federal Home Finance Agency Office of Inspector General | 18

a single-family residence. For multi-family residences, the homeowner may be able to restructure the mortgage in bankruptcy. Figure 12. Summary of Foreclosure Process by State
For further information on homeowner assistance programs, borrowers should visit www.makinghomeaffo rdable.gov or call 888995-HOPE.

State Alabama Alaska Arizona Arkansas California

ForeclosureProcess2 Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial

RightofRedemption3 1year No No No 2yearsifcourtgrants deficiencyjudgment

MediationPrograms None None None None Yes4

Colorado

Primarilynonjudicial

Yes5 Redemptionbylienholders allowedonlywithinspecified periods Yes,afterjudgmentand beforesale No Yes6 Yes7

Connecticut

Primarilyjudicial

Delaware Districtof Columbia

Primarilyjudicial Primarilynonjudicial

8 Inoptionaljudicialprocedure Yes thereisaprovisionfor redemptionbeforejudgment

Florida

Primarilyjudicial

Yes,uptodateclerkfiles certificateofsale No No No Yes,laterof7monthsafter serviceofcomplaintor3 monthsafterjudgment No 1year

Yes9

Georgia Hawaii Idaho Illinois

Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial Primarilyjudicial

None Yes10 None Yes11

Indiana Iowa Kansas

Primarilyjudicial Primarilyjudicial Primarilyjudicial

Yes12 None

3to12monthsdependingon None percentageofdebtthathas beenpaid 1year Yes13

Kentucky

Primarilyjudicial

Federal Home Finance Agency Office of Inspector General | 19

State Louisiana Maine

ForeclosureProcess2 Primarilyjudicial Primarilyjudicial No

RightofRedemption3

MediationPrograms None Yes14

Mortgagesafter10/1/75,90 days.Mortgagespriorto 10/1/75,1year No No

Maryland

Primarilynonjudicial

Yes15 Yes16

Massachusetts Primarilynonjudicial Michigan Primarilynonjudicial

17 1monthto1yeardepending Yes onsizeofparcel,numberof units,percentageoforiginal loanoutstanding,and whetherpropertyis abandoned 18 6or12monthsdependingon Yes dateofmortgage,sizeof property,andwhetheruseis agricultural

Minnesota

Primarilynonjudicial

Mississippi Missouri Montana

Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial

No 1year Generally1year;forsmall tractsno No No No

None None None

Nebraska Nevada New Hampshire NewJersey NewMexico NewYork

Primarilynonjudicial Primarilynonjudicial Primarilynonjudicial

None Yes19 Yes20 Yes21 Yes22 Yes23 None None

Primarilyjudicial Primarilynonjudicial Primarilyjudicial

6months 9months No 10days 60daysor1yearfor agriculturalland

NorthCarolina Primarilynonjudicial NorthDakota Primarilyjudicial

Ohio

Primarilyjudicial

Yes24 Beforeconfirmationofsale withtheamountofjudgment andassociatedcostspaid Uptoconfirmationofsale None

Oklahoma

Primarilynonjudicial

Federal Home Finance Agency Office of Inspector General | 20

State Oregon Pennsylvania PuertoRico RhodeIsland

ForeclosureProcess2 Primarilynonjudicial Primarilyjudicial Primarilyjudicial Primarilynonjudicial No No No

RightofRedemption3

MediationPrograms Yes25 Yes26 None Yes27

No,exceptifforeclosureby processoflaworbyopen entrythen3years Noredemptionaftersale. Redemptionpossiblefor5 daysaftersherifftakes possession 1year

SouthCarolina Primarilyjudicial

None

SouthDakota Primarilynonjudicial Tennessee Primarilynonjudicial

None

Generallyno,couldbe2years None butrighttoredemptionis routinelywaived No 6monthsforjudicial foreclosure Injudicialstrictforeclosure withnosale,6months.In judicialforeclosurewithsale mayredeemuntilsale No 8months No None None Yes28

Texas Utah

Primarilynonjudicial Primarilynonjudicial

Vermont

Primarilyjudicial

Virginia Washington

Primarilynonjudicial Primarilynonjudicial

None Yes29 None

WestVirginia Primarilynonjudicial Wisconsin Primarilyjudicial

30 Uptotimeofsale;12months Yes afterjudgmentunlesscreditor waivesright,ifwaived6 months

Wyoming

Primarilynonjudicial

3months

None

Federal Home Finance Agency Office of Inspector General | 21

ENDNOTES
1 2

Commissioner v. Wilcox, 327 U.S. 404 (1946).

National Consumer Law Center, Foreclosure Report: Survey of State Foreclosure Laws (online at www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/surveyforeclosure-card.pdf) (accessed Sept. 22, 2011). Id.

3 4

National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

Douglas County Housing Partnership, Foreclosure Mediation Program (online at www.douglascountyhousingpartnership.org/foreclosure.htm) (accessed Sept. 22, 2011). State of Connecticut Judicial Branch, Foreclosure Mediation Program (online at www.jud.ct.gov/foreclosure/) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosuremediation-programs-by-state.html) (accessed Sept. 22, 2011). Delaware State Housing Authority, NEW Residential Mortgage Foreclosure Mediation Program (online at www.deforeclosurehelp.org/mediation.html) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).
8 7 6

District of Columbia, Foreclosure Mediation Program (FMP) (online at www.disb.dc.gov/disr/cwp/view,a,1299,q,645508.asp) (accessed Sept. 22, 2011).

Collins Center for Public Policy, Mortgage Mediation (online at www.collinscenter.org/page/mediation_home) (accessed Oct. 27, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

Governor of the State of Hawaii, Help for At-Risk Homeowners (online at www.hawaii.gov/gov/newsroom/in-the-news/help-for-at-risk-homeowners) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). Circuit Court of Cook County, Mortgage Foreclosure Mediation Program (online at www.cookcountyforeclosurehelp.org/) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).
12 11

10

Indiana Courts, Help With Mortgage Foreclosures (online at www.in.gov/judiciary/home/#how) (accessed Sept. 12, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 12, 2011).

Federal Home Finance Agency Office of Inspector General | 22

City of Louisville, Kentucky, Mayor Abramson and Congressman John Yarmuth Announce Foreclosure Conciliation Project (June 30, 2009) (online at www.louisvilleky.gov/Housing/News/2009); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosuremediation-programs-by-state.html) (accessed Sept. 22, 2011). State of Maine Courts Judicial Branch, Foreclosure Diversion Program (online at www.courts.state.me.us/court_info/fdp/index.html) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). Maryland Home Owners Preserving Equity, Marylands Foreclosure Mediation (online at www.mdhope.dhcd.maryland.gov/ForeclosureMediation/Pages/default.aspx) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-bystate.html) (accessed Sept. 22, 2011).
16 15 14

13

National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

Community Economic Development Association of Michigan, Michigan Foreclosure Task Force (online at www.cedam.info/resources/mftf/index.php) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).
18

17

Minnesota Housing Finance Agency, Foreclosure Prevention (online at www.mnhousing.gov/consumers/home-owners/foreclosure) (accessed Sept. 28, 2011).

The Nevada Judiciary, Foreclosure Mediation (online at www.nevadajudiciary.us/index.php/foreclosuremediation) (accessed Sept. 12, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). New Hampshire Judicial Branch, Office of Mediation and Arbitration - Summary of the Foreclosure Mediation Program (online at www.courts.state.nh.us/adrp/foreclosure/index.htm) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). New Jersey Judiciary Foreclosure Mediation Program, Home Page (online at www.nj.gov/foreclosuremediation/) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). State of New Mexico First Judicial District Court, Forms (online at www.firstdistrictcourt.com/Forms.htm) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at
22 21 20

19

Federal Home Finance Agency Office of Inspector General | 23

www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).


23

National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

Save the Dream Ohio, Help for Homeowners (online at www.savethedream.ohio.gov/Homeowners.aspx) (accessed Sept. 13, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).
25

24

National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011). National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

26

27

The University of Vermont, Mortgage Issues and Foreclosure (online at www.uvm.edu/consumer/?Page=foreclosure.html) (accessed Sept. 13, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).
29

28

Washington State Department of Financial Institutions, Washington Foreclosure Mediation Program (online at www.dfi.wa.gov/consumers/homeownership/foreclosuremediation.htm) (accessed Sept. 22, 2011).

30

Marquette University Law School, Milwaukee Foreclosure Mediation Program (online at www.law.marquette.edu/foreclosure/) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation Programs by State (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 29, 2011).

Federal Home Finance Agency Office of Inspector General | 24